Factors Affecting Currency Value
Currency value can fluctuate in under a second. Unlike most measures of prices, currency is measured to the fourth decimal place; this varies from the common practice of measuring values to only the second decimal place. The value of currency depends on many factors, but they are primarily economic indicators, or reports that are compiled on key sectors of the economy. These factors include gross domestic product, retail sales, and the consumer price index.
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Gross Domestic Product
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Gross domestic product, often referred to as GDP, is an extremely important indicator. Gross domestic product is used to measure the net amount of goods and services produced within a country during a year. Anything imported is subtracted from GDP, and all exports are added to GDP. GDP, in fact, incorporates some of the other factors that affect currency value. Most experts have reached a consensus that a growth of around 3 percent per annum in real GDP is close to the ideal level. If the growth were lower, job growth would most likely drop to an unacceptable level, and larger corporations would struggle to make sufficient profits. If growth were much higher it could spur fears of inflation. If the figures in predicted GDP and actual GDP vary too much, investors can become uneasy due to fear of high market volatility. The fear of volatility can spread to all markets and not just the currency market. This can cause a drop in the valuation of a nation's currency as its economic stability is called into question. A stable rate of real GDP growth, on the other hand, indicates economic stability and can increase currency valuation.
Retail Sales
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The retail sales factor is exactly what it sounds like: It is the measure of sales within the retail sector of a country. Retail sales, although sometimes seasonal, can be a good indicator of the current status of the economy. Two sales reports are released: a cumulative sales report and a sales report excluding the sale of automobiles. The auto market is highly seasonal, so fluctuation in these expensive items can set off alarms unnecessarily. The theory behind retail sales factors being influential is that the trends in retail sales can influence the policies of the central banks. The central banks' policy changes can then cause the economic growth rate and inflation to change. This will ultimately result in the changing of the value of currency.
Consumer Price Index
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The consumer price index measures the average price for a standard basket of goods from year to year. The consumer price index is a key measure of inflation and arguably the most important factor affecting currency value. Due to the fact that exports are included in the consumer price index, many investors feel that fluctuations in these common consumer goods are indicative of changes in the strength of a country’s currency.
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References
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